The debate: is executive pay out of control?

With CEOs earning up to 100 times more than the average employee, is it time to rethink the way they’re rewarded? We asked the experts

The younger generation of nationals will demand change

For a region that has traditionally been light on regulation and governance, the spotlight on executive pay just isn’t as bright as in the west. But I suspect this is set to change with the developing demographics of our workers. There are two generations of nationals in a lot of the big companies. Typically, founders in their 60s, who are moving towards retirement, are sharing board space with 35-year-olds who have been educated or worked abroad. The expectations of the two groups are quite different: older, traditionalist workers’ perceptions of reward are around high-level, fixed pay and significant promises of retirement income. But younger nationals are more interested in performance-geared reward, in particular long-term incentive plans.

Companies across the GCC have been a bit slow to wake up to the significance of this difference. Reshaping the total reward offer, which was designed around an older generation, to appeal to a very different set of attitudes in the younger generation will not be easy.

If change does happen, it will be driven by the financial services sector. Saudi Arabia is a signatory to the Basel agreement, which has a lot to say about compensation for senior executives, such as the fact that performance-based pay and performance metrics should be risk-adjusted. These concepts are very new to the region, and I have sympathy for heads of HR trying to adopt such processes – in some cases, their accounting systems are not up to the standard where they can easily extract this data.

John Branch
Head of reward practice and financial services sector consulting, Korn Ferry Hay Group ME

There’s no appetite to trouble the status quo

The question we should be asking is: why was it that in 2015, which by any standards was almost a silent recession, senior executive pay still rose at a faster rate than that of any other category of worker? Last year, the C-suite and above enjoyed a pay increase of more than 4.5 per cent, the highest of all employee groups. The ratio of senior manager pay to junior worker pay has been widening every year for the last two decades in the Middle East, and yet I suspect the workforce at large isn’t even aware of it, because executive salaries are not readily available in published documents.

In companies’ defence, variable pay in GCC countries is massively underdeveloped. Typically, CEOs work towards an on-target bonus that amounts to around four to six months’ salary, whereas the same job in Asia or Europe would bring an annual bonus closer to 12 months’ salary, and in the US the equivalent of 24 months. Long-term incentive plans are virtually non-existent too, so if you’re headed into a C-suite job and there isn’t one in place, of course you are going to negotiate a better fixed-term salary.

While ‘real’ pay rises dipped to below the global average at the end of last year, I suspect this silent recession is only going to last 12-18 months. And while it is concerning that senior pay is still moving at a higher rate than the average market increase, I don’t think there’s an appetite to change the status quo. By the time organisations conduct their annual pay reviews in January 2018, it’ll be back to business as usual.

Robert Mosley
Chief executive, Lemon Pip Consulting

We continue to reward short-termist behaviours

The feeling among the public has always been that executives get paid too much, but I wouldn’t say this means salaries are out of control. In fact, they are completely in control – it’s just that executive pay has reached very high levels.

Of course, money matters – as a motivator and as an attraction and retention tool – but rising CEO pay is perhaps driven by an over-reliance on expatriates who are attracted to the UAE in particular by handsome pay packages. Most multinational companies will promise tax-free salary, a serviced apartment, free schooling, health care coverage, transportation costs, etc, which typically only last for three to five years before ‘local plus’ contracts end most of the perks. This encourages short-term stays and short-termist behaviours, such as tougher up-front salary negotiations, which typically push up senior executive base pay.

When you look at the top-ranked businesses across the globe, pay increases have been pretty consistent, but I believe the inequality of salaries in the GCC is still greater than many other regions in the world. The complex disconnect between senior executives and blue-collar workers, as well as multinational companies and local businesses, is unlikely to be resolved in the next few years. In multinationals, reward for top executives is usually linked to performance: if you deliver your numbers, you get a bonus; if you fail, you lose your job. It is basically about delivering numbers, not behaviour, which means there is almost an attitude of ‘get as much as you can, while you can’.

If executive pay is ‘out of control’, then you wouldn’t know it on the ground in the GCC. If you look at the west over the last 10 or 15 years, what’s driven the headlines around executive pay has been factors such as investor guidelines on pay design, detailed disclosure of executive pay in annual reports and accounts, listing authority rules and institutional shareholder activism, which have all raised a broad-based debate about the role of capitalism and fairness in society. A lot of that has focused on long-term incentive plans, which are almost universally provided to executives in major companies.

There is an open debate in parts of the world on how pay is calculated and distributed to senior leaders. But in the GCC, similar levels of transparency over pay are not required and long-term incentives are yet to form mainstream practice in large companies – although their prevalence is increasing.

Regionally owned businesses have been conservative when reviewing executive pay, at least when it comes to fixed pay, with many freezing base salary and allowances in 2015 and likely to do the same this year given the uncertainty over the economic environment. Performance-based rewards, both annual and longer-term, will become more important levers to align levels of executive pay with performance – an area where companies in the GCC typically struggle to implement and manage effective arrangements.

Looking ahead, Saudi Arabia – which is the driving force of the Gulf economy – will become more open to foreign investment, with asset managers and pension funds from the west able to acquire equity stakes in Saudi companies. It will be interesting to see how practices develop, not just around executive pay, but also how organisations measure financial results and report business performance.